Congress' Failed Stock Market Experiment Cost Investors $900 Million

By Bill Alpert Sept. 14, 2018 5:42 p.m. ET

A failed experiment to help small-company stocks will be buried at September’s end, the Securities and Exchange Commission said on Monday. The Tick Size Pilot Program was supposed to revitalize trading liquidity, stock offerings, and job creation for small-cap public companies–by quoting and trading their stocks in increments of a nickel, rather than the usual penny. But instead of the promised benefits, the wider increments–or “ticks”–stunted trading volumes in the nearly 1,200 stocks subjected to the two-year experiment, while also bloating investors’ trading costs by as much as $900 million, to judge from data in a study by the exchanges that ran the pilot. The study has not been previously reported.

Those hundreds of millions in added costs came mainly from the pockets of individual investors and went right into the pockets of Wall Street market makers. Ironically, most big market makers had opposed the pilot, warning that it could backfire and hurt demand for small-cap stocks.

“If these changes had helped liquidity in small-cap stocks, you would have seen people trading them more,” says Andrew Upward, a market structure strategist at one of those market makers, Jane Street Capital. “But you didn’t see that.”

Gregg Berman, a former SEC markets researcher who now runs market analytics at the market-making giant Citadel Securities, says it took him hours of searching to find the SEC-mandated statistical analysis of the pilot. The Financial Industry Regulatory Authority, the exchange regulator known as Finra, posted it on July 3, unannounced and with a misspelled heading, on an obscure part of its website. The 107-page analysis shows that the effective spread between bid and ask prices—a measure of investors’ trading

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